FEW of us enjoy paying taxes. But when you’re working, the task is usually pretty straightforward: Taxes are withheld from your paycheck throughout the year, and when it comes time to file your return, you square up with the IRS. Most people get a refund.

Retirees face a very different tax landscape—one that can be both confusing and costly. The U.S. tax system operates on a pay-as-you-go basis, which means you’re expected to pay taxes on taxable income year-round, not just when you file your tax return. That’s not a problem when you have taxes withheld from your paycheck, unless you have a lot of additional income that isn’t subject to withholding, such as from investments or rental properties. But once your paycheck stops, you’ll need to rely on income from multiple sources, such as withdrawals from your savings, taxable investment income, Social Security benefits and payouts from a pension or annuity. If you wait until April 15 to pay the amount of tax you owe, you could be subject to an unexpectedly large tax bill and an underpayment penalty.

Making matters worse, rising interest rates have increased underpayment penalties, which are based on the amount you owe and an interest rate that’s adjusted every quarter. For the first quarter of 2025, the interest rate on underpayments was 7%, up from just 3% in the first quarter of 2022.

The IRS won’t assess an underpayment penalty if you owe less than $1,000 in taxes when you file your return. In addition, you’ll avoid underpayment penalties as long as you pay at least 90% of the amount you owe, or 100% of the previous year’s tax bill if your adjusted gross income is $150,000 or less. If your AGI exceeds $150,000 ($75,000 if you’re married and file separately), you won’t be hit with underpayment penalties if you pay at least 110% of the previous year’s tax bill.